When – And Why – You Should Say “No” To $1 Million

Guest author John Fearon is CEO of Dropmyemail.com, which backs up emails in the cloud.

As a CEO/Founder of a startup, you might very well find yourself seeking to raise $1 million.

Imagine your investors say “Yes” and you get the money. Is it really time to celebrate?

That depends on the valuation of the deal. Many startups struggle to get the proper valuation with the right amount share dilution with their initial rounds of funding. It can be tough to balance the need to keep the lights on at your struggling startup versus the loss of company control and a lower eventual payout.

Greedy investors have been known to take advantage of this to get a bigger stake of your company at a lower valuation.

If you find yourself in this situation, you should bit the bullet and call off the party. Just say “No” to the investment.

Every “No” Gets You Closer To A “Yes”

In most sales bibles, it is decreed “every ‘No’ gets you closer to a ‘Yes.’” The more people you pitch to, the more doors you knock on, the more cold calls you make, the more sales you will close. Don’t be afraid to be turned down by investors or turn them down. Keep knocking on potential investors’ doors and you will get there.

Remember the much fancied “80/20” rule, where 20% of the people you speak to will give you 80% of your desired funds. If you need $200,000, you need to speak more than 20 potential people about it to have a chance to land the 4 – 5 investors you need.

Why “No” Is A Good Thing

If you’re pitching your startup to investors and you’re getting an overwhelming amount of Yeses – it is likely that you have set the price too low. Assuming that your startup is doing well and there is significant interest from investors, you should be able to value your company higher.

Multiple interest from investors is an indication that you should maximize your opportunity. To avoid cheapening your company’s valuation, set the appropriate price point, once again, according to the 80/20 rule. If more than 1 in 5 investors agree wholeheartedly to your offer, stop and readjust until you reach at least that ratio.

Know When To Stop

Raising money for your startup can be absolutely critical to keep the business going. It is also necessary to know when to stop searching for capital.

If you raise cash equal to the total amount if your company’s valuation, you no longer own your company. Fund raising efforts should aim to keep valuations at levels that leave sufficient portions of the company to the founders. Ideally, you want to ced 15% – 20% of total valuation per funding round and retain 25% – 30% for when your company eventually cashes out – either by being acquired or even with a public offering.

That means you want to raise enough to get to the next stage – not to pad the bank account. Each round of funding should have a goal (to hire more developers, set up an overseas office, create a major publicity blitz, etc). Don’t sacrifice more equity just to feel secure – there are always future rounds to find the cash you may need.

No Time To Waste

Working 24/7, startup founders do not have the benefit of free time. Every second has to be well spent – you can’t afford to waste time raising excess cash. It can take 1-2 days to pitch your business and weeks to get an for an answer.

Keep in mind, if 4 in 5 investors turn you down, you could waste 4 – 8 days just retelling your story and business plan. If you’re running out of time and money, it’s acceptable to lower your valuation to a get deal done to keep the business afloat.

To keep meetings productive for all sides, be upfront with your potential investors about how much you want and how much time they have to respond. Focus on those investors who have the funds and track record to give your company what it needs.

No More Investors Than Needed

Though you may request the same investment from every one you approach, each investor will come in with different amounts and offerings. Besides money, investors can open up their network to introduce others to fund your company. Their advice could also be invaluable to your business.

Always pick and choose carefully – not all investors add value to your company. Some will bring excessive headaches – like asking for monthly or even weekly reports. They may insist that you change your strategy and pivot when it’s not really necessary. They may say they are protecting their investment, but the founders’ standpoint, it will seem more like non-productive micro-management.

Summary Of Nos

Startup life is a hard path. It is only human to yearn for positive re-inforcement instead of rejection, especially from investors. But valuations are subjective – it will be whatever you and your investors agree upon. And saying “Yes” too early usually won’t get you the best valuation for your company.

So as you raise funds and set valuations for your startup – it actually makes sense to eek out refusals. In fact, the more “Nos” you get, the better off your startup may be.

Hold out for the right valuation, regular stock dilution and appropriate investors. And revel in the surprising power of saying “No” to $1 million.